The Macro View

Bitcoin and the Blockchain: A Complicated Relationship

Bitcoin is best known to mainstream audiences as a digital currency and an alternative to traditional fiat currency. In recent months, the focus has started to shift to what is actually being transferred on the Bitcoin network everytime a transaction is conducted: datathat represents money or value.

This revelation has stirred debate over whether Bitcoin is the lone long-term solution or if it is merely laying the blueprint for its ultimate successor (if it hasn’t already). It’s an interesting debate because the open source nature of Bitcoin allows for others to piggyback off the core ideologies that have made this new-age technology so impactful.

A number of major players across the financial and technology industries have publicly stated their interest in “exploring” the blockchain. This list includes seven of the world‘s largest companies, boasting a combined market cap of over one trillion dollars: Intel, Bank of New York, Microsoft, UBS, Samsung, IBM and Infosys. Much of their interest lies in the practical and complex issues that Bitcoin addresses such as the double-spend problem, Byzantine generals’ problem, proof-of-work algorithm, decentralization and consensus.

It is rather telling that all of the companies called it blockchain technology, not Bitcoin, and it has not gone unnoticed by many potential bitcoin traders and investors who continue to take a “wait and see” approach with this market. The impact can be seen in the non-directional price of bitcoin in Q1 2015 into early Q2 and there is clearly a sense of uncertainty around the next 12-24 months.

While viable threats to Bitcoin’s market dominance exist, it is important to remember that Bitcoin also holds a number of key competitive advantages including:

First mover advantage

Global adoption

Dedicated core development team

Proof of concept

~$1 billion in venture capital investment

Thousands of Bitcoin-focused engineers

Hundreds of companies already built to support the Bitcoin ecosystem

Bitcoin’s open source nature and the presence of powerful companies with a keen interest in blockchain technology certainly make it vulnerable to losing market share. However, the high barriers to entry and adoption that Bitcoin has built since its inception in 2009 should not be ignored.

Bitcoin Price Outlook: Neutral

The bitcoin market has been trading sideways and searching for direction since the over 8% price drop that occurred last Monday and Tuesday. Pricing has been sporadic at best and should be relatively flat leading into next week's Inside Bitcoins conference in New York. Any positive announcements that could have a material effect on the market will likely be delayed to coordinate with the event.

Turning our focus to the short-term technicals, the bitcoin market has tightened up and is currently primed for hitting singles and doubles. Over the past five days, the market has been trading in a concentrated 5% band from $219 to $229 and we anticipate this will continue for the balance of the week. There may be a few natural outliers that affect intra-day pricing, but nothing that would create sustainable momentum or wider pricing parameters. The days of hitting home runs over short time horizons are over for now.

Bobby Cho is the Director of the Institutional Client Group at itBit. Previously, Bobby was Vice President of Trading at SecondMarket specializing in trading bitcoin and illiquid asset-backed securities.

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